review: Andrew McNally’s book Debtonator

Andrew McNally’s book Debtonator (Elliot and Thompson 2015) is not about Islamic finance and the author shows no awareness of the existence of Islamic finance. However it could be a book all about Islamic finance. This is instructive. There are evident parallels between a contemporary strain of resistance to the status quo in conventional business and corporate debt on the one hand, and Islamic finance on the other. McNally’s thesis has two parts, one critical and the other constructive.

The critical thesis explains the destructive consequences of debt. As he argues both banks whose profitability (indeed existence) depends upon loans; and the tax code, which in many jurisdictions makes interest on debt deductible, have rendered debt the first recourse for corporate funding. In a nexus with the contemporary debate on (in)equality (with Thomas Piketty leading the charge in 2013) McNally argues that reliance on debt feeds the dynamics of inequality and the concentration of wealth in the hands of the few. In the nexus with local debates here in London and in other world cities such as New York, Hong Kong or Tokyo, the availability of inexpensive loans and mortgages, rather than enabling a wider demographic to purchase a family home, neutralises that apparent effect or wholly outweighs it as the profusion of credit and cash in the market inflates pricing, effectively leaving the average aspiring purchaser in the same position as they would have been had interest rates been higher. This reader felt that the treatment of debt may be one-sided and incomplete as there are many necessary functions of government and commerce that it is difficult of impossible to continue without debt; McNally does gesture at the perfunctory nature of this small book (119 pages), but a deeper analysis of debt would indicate many intermediate hues between black and white.

The constructive thesis poses equity as the preferred alternative. One that encourages patience, membership and engagement with an enterprise, and reduces risks and the exploitation of shareholders, even as it encourages increased corporate and SME growth by giving management and employees a stake and therefore increasing productivity as well as new entrepreneurial ventures. McNally’s arguments about the dangers of a high debt to equity ratio within individual countries and across the global economy have their merits however in view of further and accurate observations that he makes regarding the transaction and other costs involved in the retail purchase and trading of shares what the small investor should do remains far from clear. This is a justified outcome but a dissatisfying one, and this reader felt some scepticism regarding the rosy portrayal of equities for the retail investor. A further inference that might be drawn is that lower cost funds and trackers facilitate McNally’s prescription of wider participation in the stock market as an alternative to the currently dominant means available for small investors to invest (in the family home and if they are fortunate in a defined benefit pension).

Reading this book it seems to me that the linkages between the highly topical critique of debt and examining both its intended and unintended consequences is one that Islamic financiers and proponents of research and investments in modes compatible with Islamic commercial law should become more aware. Whether the justifications are religious or more broadly normative the economic analysis underpinning McNally’s look at the respective values of debt and equity requires further exploration and thought. Religion can be an opening to analysis, thought and thoughtful exchange; it need not be a door through which others must pass in order to engage in a conversation.